Your Money: Financial planning for the new normal

After securing the base, the money left over should be directed towards your original financial plan.

By Sreeram Sivaramakrishnan

The past year has seen job losses, job and internship offers being revoked, and in some cases, extreme exploitation of employees by companies and institutions. People are thankful to have jobs, and some have even settled for pay cuts to stay employed.

Many people had investment plans involving monthly investments into mutual funds (SIPs). There is a temptation to stop the SIPs and keep the cash in a savings account as preparation for emergencies. There is also a feeling that life is fleeting and thus, saving money for the future is futile, and statements like “life is short”, “you only live once”, and “carpe diem” (seize the day) rear their heads. There is no reason for us to let fear or fatalism dictate our lives. And I give below some financial and lifestyle steps that you can take at this time.

We have to believe in our resilience and that we will overcome this disaster. We owe it to ourselves and our families to manage the present and continue our pre-pandemic financial plans, to the extent possible.

Step 1: Securing the base

Health insurance: We need to have a health insurance plan for the family independent of our employers. We can no longer depend on our employers for covering our medical expenses. Ensure a separate health insurance plan to cover your family.

Emergency fund: Ideally, an emergency fund should be up to 12 months of expenses. Look at your outflow for 2019 and subtract any vacation spends. Add 10% to that amount which becomes your emergency fund requirement. Around 30% of this fund should be in a savings account or linked fixed deposits while the rest can be in liquid funds or fixed deposits.

Step 2: Career and self-care
Ensuring a cash flow: Ensure a cash flow by holding on to your current job or business. Don’t add to your stress by changing jobs or starting a new business unless you have no choice. If you are in a toxic workplace, endure until you get something better. Do not exit an established company for a startup.

Step 3: Make and execute your investment plan
After securing the base, the money left over should be directed towards your original financial plan. Here asset allocation is critical. Make sure you have sufficient allocation to equity, medium-term and long-term debt. Mutual funds and other securities

For equity, you can follow the formula of 100 minus age. Consider PPF, EPF, VPF as part of your long-term debt allocation. Use sovereign gold bonds to have an allocation to gold. A 30-year-old should invest 60-70% in equity, 20% in long term debt, 5-10% in medium-term debt and 5-10% in gold. Medium-term debt options include fixed deposits and debt mutual funds. And yes, you have to assume that you will live well past the age of 60. Avoid investments into real estate.

Curb spending and eschew loans
This is not the time to spend on unnecessary items. Buy mid-priced gadgets, if required. Restrict your spending on furniture and consumer durables to items that will impact your productivity. This is not the time to take new loans for frivolous reasons.

The new normal may be nothing like the old life that we took for granted. And this new normal may happen in a year or even a decade. Whatever the case, we have to remain optimistic and that has to reflect in our lifestyle choices and financial plans.

The writer is management educator and visiting faculty at leading business schools